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  CSPAN    News Politics and Public Affairs    News/Business.  

    December 24, 2012
    1:05 - 4:00am EST  

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you are watching "prime minister's questions." this is the last one of the year. it returns on january 13 korean watch online at any time, or you can find other british public affairs programs. tomorrow on "washington journal, we will look at the major events and the a look at politics as we head into 2013, including legislation in congress and the tone of american politics. we are joined by a chicago tribune columnist, clarence page, live on c-span. >> there are, unlike tomczyk, about one dozen buildings around the world that are by far the most important places of the
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internet. they are places where more networks of the internet connects more than any whorl's, and they are mostly in places you would expect, london, frankfurt, tokyo, and places like ashburn, virginia, an unincorporated suburb not far from dulles airport, where if you ask the network engineers that i talk about, they would say new york, los angeles, ashburn, as if it were a global capital and not a tiny suburb. there is a surprisingly short list of places that are the hot spots on the internet. >> andrew blum looks for the internet in the real world monday night on "the communicators" on c-span2. next, 10 years of the e- government act, improving government access and productivity.
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this is just over one hour. >> all right, so why do we not just jump into this next panel? if ms. panel was about the tenures, this panel is really about the next 10 years. what are the big challenges year, what are the things different now? from a technology perspective, this is pretty easy. i can tell you that if we were to do this today, you would say, i cannot believe you were using lte phones and 4g, as i am using 6g. joining us is a director for cisco systems business solution group, which is a global
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strategy and consulting arm. prior to that, he was president and ceo of government's strategy is of a leading market research firm from 2001 to 2003 heading the industry advisory council, a founding member of a council, and he spent 28 years in the federal government, including being the first cio at the department of commerce, and he is also a winner. doug bourgeois is the chief for vmware. prior to that, he was the director of national business center at interior, where he provided business management services government wide like the ones we talked about he had several roles at fedex.
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he has also hosted the vmware's i.t. challenge. it airs in the washington, d.c., market. mark forman is the first official c.i.o., president and co-founder of government transaction services inc. he was also the first administration for e-gov and developed products that reduced administrative burdens, including easy grant filing. and david mihalchik, from google's u.s. cloud computing business. he has helped to establish and expand google's cloud computing footprint.
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he led their efforts to -- and was part of the team that launched google apps. prior, he was a senior manager with accenture. mark, you have had the luxury of being both inside and at the top level thinking about this and implementing it and we have heard about quicksilver and place. where do you see the next 10 years? if we did this in 10 years, we accomplishments, tell us about the technology changes.
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>> we are at the cusp of a new productivity model for government. i was excited to hear about the discussion of the first panel. there are four key elements. government that information is abundant, open, and nonproprietary. i had an article a few weeks ago that some of you may have seen, the project at m.i.t. we are at a point now where it
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is not clear about the collection and dissemination of information. you think about the discussion over the unemployment rate and other things. the crisis project, a couple guys with a cluster of servers, $15,000, captures realtime data from the internet on prices. think about this, the way we do the inflation number, people come back three months later, and three months later we see what that rate really was. for six months ago. compare that to that project where they are calculating differentials are around the world instantaneously. that day that is all on the internet. i use safeway, usave, those prices are on the internet. you wonder, if the government is paper based, and why is the government collecting this? i can get that realtime information. so i think we are at the cusp, andpeople understand that, and that is what real consumerization of i.t. is about.
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second thing is monetization and shared services. we think of commoditization like windows, google apps, but the real issue is i.t. has become a service, and the services are the commoditized. government will figure that out will understand what is the service that government is going to provide, and how much of that service is a utility that can be highly automated and how much of its is knowledge based, and what -- the third thing is the efficiency gains have to come from distributed input. the productivity of the government employee operating in a silo is a model of the 20th century, not the 21st century.
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in the 21st century, the model has to be realtime assembly of the people that have the insights, and i believe the one to quicksilver, but it goes back years before we talk about it -- response time for government -- how fast does it take for government to make a decision? what are the opportunities to accelerate that? there will be big productivity gains in that. the final thing is the performance breakthroughs driven by group insights. it is no longer just competition by agencies. it may not be government that has the insight, but we have to find a way to get a performance breakthrough paradigm, which
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will come from the committee. >> a few years ago i was talking to the dutch government, and one of the things they did, they embraced this model and a survey of swine farmers how many pigs you have and how many pigs were you putting up for slaughter. there is an online swine portal that tells you every day how many swine had been killed. you just happen to the database. all those points are great, but that was interesting. alan, how we move into this vision, but there was a much more fluid dated driven model which was still hard for government?
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>> it is, and just a couple of comments hear on your first panel, a very nice feel to get, aspect to it, but i am disappointed in the sense that focus on this issue of e- government. i do not hear anybody talking about e-business. everybody assumes that is the way you do business, online, you do your banking, shopping. in government, we are still wedded to these old ways of doing business. of key drivers. i think there are other things that can be put on the table. one is i have come slowly but fiscal cliff, because i think it will actually drive government toward thinking in transformative ways, which really needs to be done.
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we have wrung all the inefficiencies about government by -- a certain school of management. we need to recognize that it is not going to come from or be driven from the federal level. citizens have more interaction with local government and state federal government. with the federal government are extremely limited. so i think we need to turn some of these things around and focus more on high-value applications. force did a wonderful job -- what do citizens want from the government? where would they want to see applications made available to them?
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citizens -- to the extent they're satisfied with government at all, they are satisfied more with their e- there are things that we can build on, the trust been one of -- is one of the most critical issues. >> yes, one of the things citizens want is speed. i ordered something the other day online and was at my house in two days. compare that with a federal agency where i was required to
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fax them a form, eight weeks go by, the deadline is missed, and the government missed out on their opportunity. sector to do something today that takes the government eight weeks -- we see that over andone thing that was alluded to is i would imagine in 10 years we will not be talking about the that cloud. do you want to talk about that? >> i think everyone in this room would agree that they did not want to talk about the cloudit is an important note, because there are a couple of things i took away from my years at fedex that were important that led to other successes in my career, and one of them was
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that in order to drive innovation within a large organization, the culture has to understand that it is not about the i.t. at all, and this is giving to the point that alan just made, it is not about as much of the electronic parts but the business and the mission part of that, and to tie that point back to the point mark made earlier, which is in to occur, at a wide scale we are talking about, the innovation needs to be focused toward the results that matter, is what i used to say, and in that sense there is good stuff that came out of federal enterpriseone of the things i found useful practicing at that time was the measure framework, which was breaking it down and say you have to keep track of the
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resources that go in, inputs, you got to keep track of the results, the outcomes, the inefficiency, but at the end of the day, you need a few key measures within that area to keep the effort focused on the end result, which is what is the mission going to gain from all of this stuff? another is the fundamental shift, because of all these things, because of the way infrastructure is now being commoditized, is being caught up and focused too much upon the infrastructure. i work with c.i.o.'s helping them come to terms with what strategy can be, which is a mechanism, but most i.t. organizations are not staffed and not led any way conducive to delivery of a service. the most fundamental transformation that needs to occur while happening at the technological level -- we are way beyond that in that
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organizations are leveraging technology for the good of the overall mission. >> we move from a role of making sure the boxes were to making sure the services work. >> exactly, and it is no longer about the box. it is really about the services that the business needs to carry out what the citizens want and what the citizens need and not about the processes from an i.t. perspective, about how can we get the server to implement it. that is not really relevant anymore. >> do you want to build on that, share some thoughts?
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>> i agree so much with what has been said. we have seen enterprise technology turned on its head, where once it was a small group decisions about the technology being used at federal agencies and now we see that has been turned on its end and consumers are driving technology. that is what we witnessed in the last 10 years, and it would have been hard to predict that the consumer device cannot consumer technology used by citizens, used by the work force, would be so influential of the technology decisions
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being made and the overall technology agenda for government. that is the major trend, major development we look at over the past 10 years, and it is the major to the element that we look at for how to shape the next 10 years moving forward. federal workers and citizens -- they want to work the way that they are living, they want to have this in technology at work they have at home, because of works, they understand it, we talk about this all the time, but there are employees that the work still to day and they have an easier time managing their kids' soccer games, their daughter's wedding, whenever it is, there poker club -- they have a much easier time doing and that is not the way it should be. we are seeing that go away.
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we are seeing agencies adopting -- consumer-grade technology, that would never made people very uncomfortable, but now consumer-grade technology has outstripped what is available in the enterprise role in terms of its performance and capabilities. we see federal agencies adopting cloud computing and employees getting more powerful technology at lower cost and are able to do the things that they can do at home. over the next 10 years, we will see more of that. when i think about the next 10 years, one of the things in looking back, even over time since i joined google in 2007, we can expect 10 years from now whenever people are complaining about or warning us about today is probably what will be adopted 10 years from now.
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when we think about all of -- in 2007, i was told i had made a terrible decision. when i said i was joining google. i was going to be working on cloud computing within the federal government public sector, and people said, do you realize what you have done, because this is never wrong to happen. the government cannot adopt cloud computing, it will never happen. procurement, this, that. it has happened, and it has happened across state governments. i think the marked success in 10 years will be how far we have eliminated the gap between when the private sector was adopting technology and the government has adopted technology. i think that really plugs into
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what my fellow panelists have talked about, as well. >> a few years ago i remember there was a federal agency that put out a tender to create for a contractor to build them and -- an expensive system that would allow them to host chats and postings, and i thought isn't -- and postings, and i thought, isn't that facebook? linkedin? those are free. i do not know who wants to jump in, but part of the challenges great free applications in the private sector and use them in government, and maybe the cia would need something more higher grade, but is that part of the vision in the next 10 years? >> let me say a key part of understanding -- i fear the
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government i.t. community has become the insulator of the bureaucracy rather than the catalyst for transforming, and that is part of the issue. maybe as a community, we are so out of sync with the things that david is raising, business or social media techniques. i am thinking about derivatives, where today hit the wall when a supervisor [indiscernible] their legacy, approval processes. they had a great contest -- >> and telepedia -- it is like the wikipedia for the intelligence community. >> at the same time congress had pursued it and gave it a budget, and these guys were doing it with a couple servers, and it cost the government less than
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$150,000 a year, as i recall. they hit the wall at the supervisor level, and get this large project -- -- and yet, this large project which was given to the i.t. community became a large project. it fell right into the paradox, and many of you may know that that paradox is a guy from the canadian treasury who to get his certificate from one of these i.t. project manager courses had to write a paper. he said, look, we have known for 20 years how to deal with the problems in i.t. projects, and yet, we keep making the same mistakes. why? i think that is ultimately the decision. we have to get through the
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paradox. projects can be more than two years. the champions of got to be there for that two years. -- have got to be there for that two years. what happens, i think, with any of these, something i have seen, as soon as the 20 reasons why that was a bad idea. you are thinking, do i want that no risk? i think it makes it hard to adopt these things. at the same time, i look at continued innovations. i would say one reason i have a lot of hope for cloud base technology is vico's it is so
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low. in the old days you had to make a capital investment. those were basically capital investments. in the cloud you sign up with your home e-mail address, you are in, so government is trying to figure out how do we enforce our rules? these tools are going to be used. they will be used, and i think the government has got to try to figure this out. >> i would say the positive thing today, if you extract from the comments, the technology is morning prevalent
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and powerful, reaching more prevalent and powerful, there are pressures to change because of fiscal threats. we have a new generation coming into and a generation leaving government that in many ways is the transformative change i talked about earlier. as long as you have government where the social security administration still roams the academy, -- still believes the academy, and we recruit and train them in technology i used all those years ago when i was finishing my dissertation.
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it gives me great hope you have a generation that is not only more comfortable with the technology but is more collaborative in their decision making style that the perfect storm gives me hope his next decade will bring about dramatic change in the way government interacts with people, and i think we ought to be talking about the way government now changes -- the way government changes. >> you mentioned specifically, the technology and the expertise. the thing that is very exciting
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to me, one of the things that is happening now because of cloud computing but also because of other innovations and efficiency is gains from imposts and -- inputs. the infrastructure is a lot easier. tablets are proliferating not just to citizens but to employees. the thing that has not caught up is the middle, which are being used to deliver services, and what i see is the opportunity to glue many of these aspects together, for government to be able to tap into new software development methodologies and models such as crowd sourcing, which do not
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require them to be government employees at all, plus an allowance retiring employees to tap in when they want but still controlling citizenship can have access and still tap into distributed knowledge and expertise that can really change how government is developed, and i am talking about taking this $50 million procurement we are used to and turn it into 250 that are developed by smaller teams that are more dispersed but to do it in a way that is tying into the expertise the government has in the private sector house and mashing it together for a more efficient, more rapid new model.
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>> every time i go to my ipad i see it of a button that says the upgrades you can do. that seems to be the model, upgrades and changing. one thing i worry about, in the private sector when there are big cost pressures the company is facing, they usually have flexibility to take those pressures and adapt. i worry federal government will not have flexibility. it will shrink and do less and not do it as well. some of these things require a little bit of investment. the idea is if you invest now you saved later. are we thinking about that the right way as we move to a more constrained environment, but we ought to be doing more right now? >> this is one of the great
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paradoxes of government in the last 30 years. from an industry perspective you always think technology fosters innovation, but you do have to get over the investment hump to see the benefits. there are companies that cut their i.t.. it is an improvement in worker productivity, and this is economics 101. you spend more to improve productivity. that ought to be the measure we are looking out, cost of operations. >> and there is a challenge in government when you do this. they came initially to have a trademark office, and that place it is pointed toward now
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is a real place of innovation in terms of use of telework. there are online search efforts. we never spoke in terms of productivity for a couple of reasons. one, because we felt congress would take away the money and take it away early as opposed to waiting until later when you can demonstrate to them and also some opposition from within, because it is a unionized, heavily unionized labor force, and almost all of the labour force are attorneys. is subject to strike fear in your heart, a union of lawyers, but i could point to other
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places in my experience. we never talk about productivity issues because of the pressure from unions and the fear -- they were just as guilty as this, taking the money away. in the beginning it is often more expensive, and you achieve savings over the long term, but if you take them out in the beginning, you have almost assured yourself of failure in terms of your ability to deliver citizen needs, etc. >> this is going to give me the opportunity to tie back to a comment i made earlier about resources, the of efficiency by which you deliver results and the value to the mission as our results, because there is a little bit of light in that example.
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we were able 0 look at where our opportunity was for more efficiency but we had available, which is taking a fledgling electronic filing approach and turning it into an electronic pipeline and business process. in order to do that, we lowered our operations cost 20% in order to lower the hump of investment. in less than 18 months we had gone to an on-line process and save $30 million a year. did that make the pattinson better? probably not, but it certainly made it more of efficient, which was a low hanging fruit at that time and i think it gave away potentially getting the better value overall in terms of a better value. back to the point mark made
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earlier, the good news is getting something in return does require a return on investment. because of the way technology has progressed over the last few years, there is a much lower cost to innovate. that is not necessarily required anymore. in addition because of features cloud computing has brought on top of this infrastructure, the time to value for that investment is really compressed, so if this project was going to lead to a return of started four years from now when we implement a thing, it is being implemented in a much more compressed fashion.
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the value to the mission is starting to accrue in four months, five months. both of them are taking this investment hump and shaving the top of it. >> i want to build off of. mark made, which is essentially in this new world of boundaries between this organization and the environment are getting more porous, and a company like procter and gamble, when you think about government you do not think about boundaries. how do we get there in 10 years? what is the opportunity for a much more crowded stores provision of problem solving grumman -- crowd source provision of problem solving?
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how do we tap into that salmon and now people crowd stores government -- how do we tap into that? people crowd source government. how do we get to that where people are proud sourcing? >> one thing is the idea of management, and that has become a huge barrier to moving off the legacy, so being able to do this in a way that integrates with your customers, i think alan mention most of the transactions are not with the citizens. it is starting to change largely because of demographics. you have people that used to be that the transactions were one direction, the money from the federal government.
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it was the irs. it is now changing for more significant portions of the population that are receiving the money. it is largely the education department, and the veterans affairs department. the identity will either be -- we have multiple generations. i love the things we are doing with the startup company. let me make this a little bit bigger. up until a few months ago, they decided they did not want to publish how many forms there were. there were over 6000 forms and the federal government. there were over 4000 data sets. how do you go from 6000 data collection forms to 400,000 datacenter is? -- datacenters?
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incidentally, over the last few years, there have been five forms. my portion of the world, in the grand arena, you have three pavement agencies. 3/4 of the federal grants, and the system that goes along with a vat is payment management. -- with that is payment management.
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we try to work with the department to get this rectified. then, they have to agree on identity. not that they couldn't agree, but it has such a huge ripple effect because there are so many different generations. i think that is step one. >> what do you mean the identity management system? >> the first thing is the policy on identity. is it a rest based or individual based? -- arrest based or individual based? they have found ways to resolve that, but we have education, we have
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none of these seemed to have solved this puzzle. that is number one. we need to deal with this issue of identity. we will see a whole lot more innovation. we see a basis for treating case management, the veterans, the security. so many walls come down once we get there. >> there has been a huge amount of progress. moving forward to adopt this
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new technology. i think there are summaries and analysts where government is leading or on par with the private sector. even if we sat on this panel 18 months ago, i am not sure any of us would have predicted the agency would be moving away from the platform. even 18 months ago, i am not sure we would predict that from happening. it is possible for the government to adopt this new technology. that is where the technology needs to be moving forward. shortening that loop and the lag time, we look at the history. when the internet and the pc came along, wireless came along, the blackberry came
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along, the government said no. we can't adopt that. maybe we can use it years on. the government can use them. this is not an easy problem to solve. the focus needs to be how government can get the benefit of the technology before it is outdated. the terrible program efforts in the history of the government the others are familiar with are the efforts were so much time has been spent and money invested. it took so long, and you can stop the march of time -- can't stop the march of time. >> somebody gave me a factoid a while back, the number of
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workers per gigabyte of storage is an order of magnitude less than the number of data centers the government has. which comes to the point that we needed data center consolidation. every member of congress will be blocking that. do we need a national base closure commission where it is an upper down vote? can we get there with something less than that? >> i was told there would be no math on the panel. i am still working those fractions. sure. this is what google has focused on. it is what we started, it is what larry did in the garages.
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we don't expect the government will be there, but that is certainly the direction that all of the firms we are representing here have lessons that can be learned. i think the principal areas, i get asked many times by representatives in government on how we can innovate like google. what can we learn from what they are doing? either the data centers, the overall philosophy, i think that one is relentless focus on the user. the technology is not serving just the staff.
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it is about changing the way that the users work, be it citizenry or employees. we had this idea for engineers to be successful, they need to be uncomfortably excited about what they are doing. and i do think there needs to be that in government as well. we talk about the challenge to break this model and get out of the path of what is acceptable to be done. take on more risk and recognize that the mission of the government is so important. >> consolidation is an area where the government, while getting out aggressively and quite publicly has clearly fallen behind the commercial sector. the data points that i have been some of the customers i have worked with is i have seen
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now the best practices getting beyond this 30% mark where it is a key component to consolidation. those getting up to 90%, their savings are more than double of what is happening in the initial phase and the government is still stuck by those numbers. >> can you explain what that really means? >> that is the overall infrastructure utilizing virtual was asian technology as a means of consolidation. -- virtualization technology as a means of consolidation. you can run more stuff on it, which means more efficiency. first, getting past 25%, it is a challenge for the infrastructure.
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something different, something more needs to be done. i spoke recently with a very large global manufacturing company that makes hardware and software and all this stuff. they said they got to this sticking point. they looked at their application portfolio and rationalize that. they said we need to retire this, we are going to upgrade those and pushed that up the hill. they saved 2.5 times what they did initially. this is a space where the government has yet to begin to help. >> the data center consolidation discussion, it is a red herring if you don't get the complexity of the legacy of hundreds of thousands of redundant places.
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we have common services of government paid for by homegrown applications. that is what is driving the class structure. it is a cost of quality issue. all our contracts are essentially labor-based contracts. when you say you will consolidate data centers and you don't get rid of labor-based contracts, you miss the complexity of all these redundant applications. we are buying applications, we are buying people to maintain those applications and run that infrastructure. the complexity of those
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applications is driven by the fact that they were uniquely developed. you consolidate the data center, you maintain those programs. you're maintaining a cost structure because you still have to buy the people. when you get to the point where you consolidate applications, you get to take advantage of that. google started that. it was scalable. you get huge economies of scale. the government can't achieve the economy of scale with a data center consolidation because it doesn't want to standardize. it is fairly simple. you put a program on the books, the program has to be able to sustain itself.
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but whose job is it to consolidate these applications? who will go to congress and ask for the funding? this is the funny side of data centers. it is that they have got to have sustainability within each program. i think we're going to make it through, figuring out that concept. other concepts being considered by folks on the hill right now. we have good insights and thought leaders, it is really important. >> what are the steps and impediments?
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how long will it take to get online voting? >> i can be part of that and i would be happy to share the study with this. understanding the international application leadership, one of them is on identity signatures. one of the proposals we made is that the u.s. government, when any citizen wants to renew their passport, they would have the ability to get with their passport a digital certificate. why would i get one? why would i have application when no one has one? the government can play a role in getting over that chicken and egg thing. i see us a long way away from that.
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eventually this will happen on its own in an incremental way, but it is a long way away. >> why i agree, one of the things that we did to enable electronic filing was because of the confidentiality and integrity of the requirements that we had, a digital certificate approach. we were able to get all of the patent attorneys to get their digital certificates. they delegated that because it was too much of a bureaucratic burden for them to be straddled with filing applications myself. they were breaking the trust that the digital certificate actually requires. then we look the other way and say that is fine because it is coming from the law firm anyway. it is a cultural thing, and folks don't necessarily want to change.
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you're talking about the scale of citizens that is a significant challenge from the cultural standpoint. standards need to evolve and architecture is of the application need to evolve with it. it is as simple as that. until those things happen, it is not going to happen. it is starting to happen from an application standpoint moving to the enterprise -- we are seeing it happen certainly in the commercial side. >> let me lay out a plausible scenario. i cannot say this is the way it is going to happen. i think that electronic voting will be one of these overnight major election shifts, not a gradual buildup. i also think we have missed the online website version of that. part because it has not shown
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its reliable and secure. there is a very rapid emerging -- i think it will sweep through the country similarly with your cellphone is essentially part of your identity for processing. >> there will be some experimentation -- it will be lots of little elections and all of a sudden it will hit a major state or national. every state will have to have it. at that point we will see the tipping point. >> not that i would disagree with any of this, but i do think one of the differences is that identity in that form can only be given by government. there are lots of identities that can be given by your bank. if you look at sweden -- a deputized their banks so that they were sort of in lieu of government. you got a credential that the
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government would recognize. there may be ways to do that. >> we have seen precedent for that with electronic benefit transfer. they use the power of the reserve and deputize the bank's. >> yes. >> i would like to hear, in which area you think in 10 years we will have made the huge strides -- education, health? where will be citizens really feel that government has changed and has used technology to change? >> if you go back to a time that the quicksilver task forces were working -- the council for excellence and government commission to uphold and identify on the part of
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citizens their areas of priority in which they would like to see government take action first. health care was the first one. we certainly have now, with this election, i hope agreed that we will move forward in this arena. that to me is the likely candidate. that is where citizens are actually most interested. and that is where a lot of work is being done on the trust issue. there, government does have funds dedicated to achieving that purpose. that is where i would define it. >> one of the things we have not actually used the word big data although we have been talking a
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little bit about it -- wonder folks to talk about that. the big benefit in health care is around big data -- certainly one big benefit. the ability to know in much more real time, disease vectors and treatments and the like. in 10 years, are we going to be there? a little bit here and there now, but we are not there yet. >> it is difficult to look through a crystal ball. in some ways you can say we will never actually get their. but i think alan's response was very consistent with what i would expect. healthcare is an area where people are going to see the benefits initially because there is so much activity going on. in some ways is because there is a focus on the data aspect and a lot of focus -- not just started two years ago. they started a long time ago and are beginning to culminate in changes in how things occur.
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some of which are legislative. i would also say there are things going on in areas where citizens are getting significant benefit that do not know and may never know, like the intelligence community, where things are happening already in a very progressive way using these types of technologies in technology today that citizens are getting benefits from, but you never know about it. my point is, i think 10 years from now there is going to be benefits gain in almost every area of interaction with government, whether it is direct or indirect. >> i think there are too many bond market forces operating in health care. -- unmarked courses in health care. we continue to fall behind europe in most studies in terms of the outcomes. i think about what is different -- we are investing a boat load.
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are we going to see anywhere near the delivery services? i would like to see us be the global leader. >> there are certainly challenges in that area. a couple of them are you look at the demographics -- most of the damage -- health care in the country is delivered by medical groups of less than five practitioners. it is like the cadre in government -- they are all middle-aged and above. like trying to imagine we're
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going to run a food delivery system by a network of corner stores. certainly there are challenges, but the confluence of where citizens are looking, the need, the availability -- it is an arena. >> i think it will be in three core areas -- national security, we are you see things become less encumbered and less partisan. also, driven as much by local government as anything. third, we have not talked about education. the reason i think education, there is a tremendous amount of untapped research in sight that
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makes sense -- i should not say makes sense, is there for the education and government community to tap into. there was so much going on in technology -- getting content open and transparent, virtual last classrooms, and we see a tremendous disruption the way higher education is being delivered. there are some institutional things going, but they are so much more focused on results. investment in r&d, availability of information. ironically, this could be the greatest benefit of nassau, not the department of education, and perhaps the department of energy as well, in education. k-12 released 0-12.
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-- or at least 9-12. >> i am very interested in program transparency. what ever happens with the fiscal cliff negotiations, government agencies are going to be extremely press from a budget and standpoint. in the short term, it seems to be -- having a legacy system cannot be afforded. how do we overcome the cost pressure of making things open, making them accessible? it is not free. i am really interested in comments about the impact of the realities of cost on making things more accessible and open. >> i am fascinated by the trend we have in front of us. we have the modernization act, which should have added to that
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and facilitated improvements in efficiency. you have budget pressures which should dovetail nicely with modernization. yet when you look at dramatic increases in it investments over the last couple years -- and there have been, they are largely associated with legacy approach is creating a future funding stream for a sil within the bureaucracy. -- silo within the bureaucracy. this is the great paradox. if you have limited funds to invest, it would seem that cfo's certainly supporting investment in shared services which would cut the cost across government. there is no incentive for any one investor and no incentive for anyone on the appropriations subcommittee. >> let me go back -- you are the last. >> the example i used about applications and the benefits
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they provide in enterprises, the example of the end of multinational i.t. cos. they were no different than any other organization -- 8% of their costs went into maintaining existing stuff and 20% went into some degree of innovation. new applications, add on some interesting stuff. when they got done, through the infrastructure consolidation, the application rationalization, they got to in dew point. it changed to 60% going into keeping the lights on and maintaining and 40% going into new innovation. they doubled the amount annually the company gets to put into new, innovative services, capabilities, bringing new things to market. they did not get a bunch of investor money in the process because of keeping the curve down. they had to keep up the evolution. they did not pump up against the
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ball and say, i am done, i am stuck here at 20%. they were able to continue to self fund through savings they were getting. >> we need to stop -- i encourage you to have the conversation. i promise people we would adjourn. do not get up -- i would like to thank this great panel and our first panel. [applause] secondly, there is an enormous amount of events for a small think tank -- the reason we can do this is because they do such a fantastic job. please join me in thanking them for the wonderful work they have done. [applause] also my colleague. thank you all for coming. i look forward to continuing all these conversations in 2013. happy holidays to everybody. [captioning performed by national captioning institute] [captions copyright national
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cable satellite corp. 2012] >> tomorrow on "washington journal," former education secretary william bennett reviews major news events and looks at the political and cultural and social changes in the nation today. clarence page gus is the political environment as we head into 2013 and the tone of american politics today. "washington journal," live at 7:00 a.m. on c-span. >> now, the fiscal health of multi-employer pension plans. these are plans collectively bargained and maintained by more than one employer, usually in the same industry. we hear testimony from the pension benefit guranty corporation. this is about an hour and a half.
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[inaudible conversation]
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>> the subcommittee on health, employment, labor, and pensions will come to order. it is good to see you again. we appreciate you taking your time to be with us this morning. i would like to take a moment to extend my condolences to the people of newtown, connecticut last. we, an unspeakable act of evil killed 20 children and six adults. changing our community forever. as a nation, we continue to stand by the people of newtown. i now yield to my friend, congressman andrews, for any comments he might have. >> good morning. thank you for continuing our gathering -- beginning a gathering with the proper memorial to those who suffered such a loss in connecticut and
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across the country. this is the committee on education and labor. the idea that such an act of pure unadulterated evil could take place in a school in this country is not something we can easily process. suffice it to say that there is unanimous feeling on this committee that our hearts and prayers go out to all those afflicted by this unspeakable loss. there is a higher purpose in life than politics. is loving children. and extending that love to those who suffered from this is something i am certain i will join you in with a heavy heart and strong conviction. >> on behalf of the committee, i ask that we honor members who died by serving a moment of silence. please stand.
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you may be seated. thank you for that privilege. now let's turn to the issue before the subcommittee this morning. today's hearing is a second opportunity in recent months to examine the multi-employer pension system. in june, we discussed broadly politics discovering -- governing the system and structural challenges. since then, news reports have reminded us of problems plaguing many pension plants. hostess brands, and iconic american company, decided to close its doors and lay off 18,000 workers. hostess participates in 42 multi-employer pension plans, and its total withdrawal -- the penalty they pay in exiting the plan could exceed $2 billion. yet it is uncertain whether that money will be collected in bankruptcy. those employers who remain in the plants will have to provide
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hostess in please the retirement benefits they earned. regrettably, the story is one becoming all too common in the multi-employer pension system. an employee withdraws from the pension plan, leaving behind unfunded promises to remaining employers. this can drive even more employers out of the system, creating a domino effect that undermines the strength of the individual plan as a whole. these events have a profound effect on workers and also impact pension benefit guaranty corporation, the agency providing assistance to multi- employer pension plans in distress, irresponsibility that has grown significantly in recent years. -- a responsibility that has grown significantly in recent years. has obligations of $7 billion and a increase since 2011. the agency believes there is a 30% chance its program will be insolvent in less than 20 years. meanwhile, its total deficit
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continues to grow and now stands at $34.4 billion. maintaining the status quo is no longer possible. governing -- they will expire in two years, meaning congress has an important opportunity to study the system, assessed its strengths and weaknesses, and produce solutions to support workers without discouraging participation in the voluntary pension system. we need the fact as quickly as possible. unfortunately, the administration has a history of slowing the work of this committee. it took nearly nine months to get answers to questions submitted by members of the committee, both republican and democrat, after a hearing in february. only now are we able to complete the hearing record. i am also troubled by missing reports that were due last year. these provided important details on multi employer pensions, including the sufficiency of current premium levels and the impact of funding rules on small
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employers. the law requires the pbgc to finish these reports by the end of last year, and that we're still waiting. we are now told to expect reports by the end of this year. congress is ultimately responsible for legislating changes that will improve the long-term health and stability of the multi-employer pension system. we cannot do our work with the administration fails to do its job in a timely manner. blaming this for a law enacted six months after reports were due is not acceptable. the success of the multi employer pension system depends on many factors, such as a strong economy, promises, and a diverse group of british spitting employers. it also requires policymakers working together on reforms that serve the interests of workers, employers, and retirees. mr. gotbaum, i hope you will help us get the answers we need without unnecessary delay. thank you for your service. we look forward to working with you. i now recognize my distinguished colleague, rob andrews, a senior
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democratic member of the subcommittee, for his remarks. >> good morning again, mr. gotbaum. thank you for being with us. and for your service to our country. you are running a very important agency and i know you are very dedicated to that task. it is good you are here this morning to answer the committee's questions. 10 million americans benefit from a system that has served this country for many decades very well. it is a system where pensions and other benefits are provided, where small business people, contractors, trucking companies, markets, supermarkets, and others, get together and pool their resources and share costs in order to provide pensions and other employee benefits. this is what is known as the multi employer system. the multi employer system, in all cases, involves a collective bargaining agreement that sets the terms and conditions for benefits that will be given. the system has worked
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extraordinarily well, and it is the system that 10 million americans rely upon for their pension. it is essentially and fundamentally sound, but there are some significant problems that we must deal with in order to assure its soundness. the graphs to my right tell the story of the last few years in this situation. prior to the financial downturn of the first decade of the new century, by and large multi employer pension plans were exceedingly healthy. we then had the downturn of 2001, followed by the market crash of 2008 and2009. -- and 2009. are in a situation where only 32% of multi employer plans were in the healthiest category in 2009. that number has now grown to 60 %.
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improvement in the economy and several steps taken by this committee, at that time under the leadership of our present speaker, john boehner, helped us the toolsusties thees to improve the situation. the disturbing part is the red category at the bottom, which indicates roughly 25% of plans are in some significant financial distress. this distressed flows from a variety of causes. typically, because the employers, the trucking companies, supermarket owners, construction contractors, are in very difficult segments of our economy. talk to any electrical contractor, air conditioning contractor, trucking company, they will tell you they have had very difficult times over the last 56 years. that manifest itself in less money coming into the business, fewer workers paying into the fund. the second problem we can all
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see in our own 401k account or thrift account in the case of federal employees -- as market values have tumbled, so has our retirement account. the investments in many of these funds have not kept pace with the needs of employees. the third is a sort of demographic tidal wave that i have to take some responsibility for. i was born in 1957, so i am part of the baby boom generation. as they begin to retire and relatively few workers are in place to pay into funds, more people drawn out and your people paying in -- that is a problem we see in medicare and social security and single employer plans and these plans as well. the task that is before the committee is to think about ways to properly balance the health of the small businesses that make up these plans so they can continue to thrive and prosper, fairness to present retirees, and a system that protects
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taxpayers to the maximum extent so that the promises made by the pension benefit guaranty corporation that mr. gotbaum leads would never have to step in and reach into the federal treasury in order to help these plans should that occur. i would hesitate to point out that there is no explicit guarantee from federal taxpayers for these plants, but the last five years have certainly shown us the hazard of this. taxpayers are very often called upon to make good for promises they never explicitly made. our goal as a subcommittee, which the chairman has pursued diligently for the last year, is to make sure that the day never occurs when we are in a situation where the 10 million people who are in these pension plans would ever require any consideration of a taxpayer help for that happening.
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i am encouraged that this is the second hearing we have had to delve into this issue, and i look forward to working with you in the new year to find constructive solutions so that we can insure the continued vitality of the businesses that pay into these funds and the continued security 10 million americans rely on. >> thank you. pursuant to committee role 7c, all members will be permitted to submit written statements to remain in the record. the record will remain open for 14 days for all information to be submitted. it is now my place to introduce josh gotbaum, " has served at the pension benefit guranty corporation since 2010. as director, he is responsible for the budget, investment, and other aspects. he holds degrees from stanford, harvard law school, and the kennedy school of government. i understand the family members
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here and would appreciate you introducing your guests, if you would. c on.n your mi >> thank you. i am accompanied this morning, in addition to by the very competent staff of the pension benefit guranty corporation, by my mother in law, who i will say to evidence the bipartisanship with which i think pensions should be done -- >> it is not necessary to swear in this witness -- no one would fail to tell the truth in front of their mother in law. [laughter] >> also my son, adam. >> thank you for introducing your guests. let me briefly explain -- you have five minutes for your testimony. the light in front of you will turn green. when one is left the light will turn yellow and when your time has expired the time will turn
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red at which point i will ask you to wrap up your remarks. members will each have five minutes for questions. i appreciate your testimony. >> members of the subcommittee, thank you very much for holding your prior hearing. thank you very much for all in this hearing. with your permission, i will summarize the main points. i want to start with something which is basic, which is that multi employer plans are important. i come from the business community. employee benefit plans are complicated, and one of the real benefits of multi employer plans is day permits several hundred thousand businesses, mostly small businesses in many different industries, to provide retirement security without needing a big hr department, just by writing a check. that is a huge benefit. in addition, as mr. andrews
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noted, for more than 10 million people and their families, multi employer plans give them a pension that is affordable, that they can take with them from job to job. that does not require them to become an investment expert or an actuary. and that gives them an income they can depend on for the rest of their lives without worrying that they or their spouse might outlive them or their 401k. as you can see from the map, you are right, my left, multi employer plans cover businesses and people in every state in the union, and i daresay virtually every congressional district. like single employer plans, the last decade was tougher multi employer plans. their investments shrank but their commitments did not, so their contributions necessarily rose. at a time when the businesses
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had less work and less ability to pay them. six years ago, a bipartisan coalition in congress, with the support of the business and labour community, past the pension protection act. that was an important piece of legislation. it recognized not all multi employer plans were alike. some plans were healthier than others. different plants have different needs. that they need flexibility. two years ago, a similar bipartisan coalition past the relief fact, recognizing that maus i employer plans and single employer plans needed greater funding flexibility. where are we today? after all the events of the past decade, the financial health of these plants varies widely. as you can see from the state is ph, there istus gra
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a wide range of financial conditions. two years ago, about 1/3 of all the participants were in that reported they were in green status. today, about 60% -- excuse me, that is not true. the information we got a few months ago, as of the beginning of 2011, 60%. we think that is good news. what that means is that a majority of the participants are in plans that are recovering. they are covering for a variety of reasons. in part because of their markets. in part because they were conservative. in part because they use the authorities that congress gave them under the pension protection act. in part because of funding relief. in part because of luck.
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however, a minority of plans, maybe a couple of hundred. lacked the necessary economic base. as you can see, that is a smaller set of the population. it is not most plants. it is the minority of plants. but it is a significant number of plants. s. they have your active employees. the as they do have maybe unwilling or unable to cover the costs of retirees, particularly the orphan retirees of other companies that no longer contribute to the plan. without changes, some of these plans will not be able to avoid insolvency. as in the past, the reason i am personally encouraged -- multi employer plans, their employers, their unions, they're professionals, are stepping forward and looking for
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solutions that everyone can endorse. they are changing to allow flexibility, changes to allow the plants more robust rules, one effort worth noting is that retirement commission sponsored by the national coordinating committee on multi employer plans -- we have not seen the results of their work. they have been insisting that they keep government out. but they say they will come forward. we look forward to hearing their results and commenting and analyzing it. we think that is the right step. but the congress has always done is working conceptually -- consensually with the businesses and unions that make up model employer plans to figure out what works. we think the right answer is to hear from the industry itself and respond and work with it. at the same time, pbgc's multi
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employer insurance program needs a fresh look. this is a program that has not been substantially modified in 30 years. pbgc does not have the same tools form of employer plans that it has for single employer plans. pbgc pays lower benefits for multi employer plans than single employer plans. pbgc gets much lower premiums for multi employer plans than it does for single employer plans unless there are significant changes in the plans and the pbgc present finances, the agencies will eventually end up without the tools to help the plans improve. without the resources to continue to pay benefits for those plans that do fail. i am, as one who spends his life working on fixing businesses, an optimist. the next two years provides an
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opportunity. an opportunity for multi employer plans, their businesses, and unions to work together with the congress and the administration to develop approaches that are flexible, practical, and facilitate self- help. that is why then we are enormously grateful for the committee's continuing interest. i look forward to hearing your comments, to answering your questions, to finally providing the reports we have voted for a year, which i regret, and to working with you to preserve what is a really important form of retirement security for tens of millions of americans. >> thank you for your testimony. i really appreciate you been here a week before christmas. i thought it was very important. the reason for that was because we had a -- the pp sona sets in 2014. both sides of the aisle understand we have a time line with the sunset to get moving.
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i was worried if we put this off we would be into february or later to get this done. i certainly appreciate the multi employer improvement there. my question is, after reading your testimony, that is somewhat an improvement in the economy, but it also -- is also changes in the law in 2010 because something allowed to amortize these over a different period of time. how much of that is due to amortizing to 29 years -- how much of it is due to the change in the law we passed in 2010? >> dr. roe, you are unquestionably right that part of the improvement is due to the fact that the funding relief allow plans to stretch out their required contributions. as a result, indicators of distresse -- sometimes no longer meet.
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part of the improvement is clearly that. i think it is important to recognize that an important part of improvement is also that the economy is recovering and planneds are taking advantage of authorities that this congress gave them. unfortunately, the quality of information that we have, the information the federal government gets, is a little old. and so the reason why you have 20 levin is because that is the latest information we have. we do not have enough information for me to be able to tell you how much of this is funding the relief and how much of this is an economic recovery. >> i think it is both. i am just hoping it was not an accounting gimmick. understandably, i certainly understand that companies need some relief because they do not have the cash flow to make pension operations. that is something we need to
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look at. the other thing -- multi employer plans versus single employer plans, there is a difference in the premium. i know the financial status is strained -- i was reading in your testimony, it is $9 with a single employer plan and $42 with a multi employer plan. it looks like very soon -- at least last year we paid out more in the multi employer plans and we took in in premiums. we obviously cannot continue to do that. by 2020, or eight to 10 years from now -- you estimate will be paying out $500 million in plants. the last question -- how you propose to change that since the premiums only bring in 20% of what we will be paying out? although it is indexed for inflation. how you propose to do that? what recommendations do you make? >> that is an important question.
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certain things we know and can say right now. one thing is the situation as it currently exists cannot work forever. if we had the premiums as they currently are and the system as it currently is, and eventually we will run out of money and cannot pay benefits. however, and this is what we have been wrestling with -- it is clear to us that because our program has not been changed in 30 years, changes that ought to be made, some of which will clearly involve higher premiums -- i am a finance person and i do not believe about prevaricating about numbers. some of this will clearly have to involve higher premiums that reflect the cost of this. this is the reason why we do not
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have a set of recommendations yet independent of what people are going to do. part of the solution relates to what the plans themselves are allowed to do. if plans, using the tools the congress might give them, as you consider changes, can continue the transformation that our situation is different. what we hope to do, as part of your discussion over the next year or two, how to change the multi employer system to work with the congress in pbgc's program and finance is. >> one of the other changes -- they had the previous accounting rules. one of the rules is, should we assume the roles the past in 2010?
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the other question -- my time has expired. are these assumptions, and i have my list of questions, assuming a 7.5% return -- you follow me, that is a lofty assumption. mr. andrews? >> thank you. when you think we would have results about 2012? i realize you cannot have those -- a reported by various plans. when will you know the results for 2012? >> we will no them toward the end of 2013. >> ok. one of th>> one of the issues, . andrews, is the information requirements we have are from the typewriter and carbon paper days. >> you may have to explain this references --
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>> carbon paper is something that [laughter] sorry. we are in an era in which i can get and send information around the world in a second. >> let me ask -- you have a very widely acknowledged and listened to a collaborative process begun among small businesses, unions, experts in this field. i think the chairman has done the same thing and it is an good thing to do. without prejudging, let me ask you a couple of questions. the first is that, given the relatively low cost of obtaining money, that's stretching payments out over amortization schemes has been pretty effective in 2010 hoeven plans
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get to the green zone. is that right? >> it -- in 2010, helping plans to get to the green zone. is that right? >> they are an important part. >> if we were to get the hammer down on plans in the red sun -- pay up right now, it would in all likelihood seriously impair or kill a lot of these plants? a lot of employers would just leave? you have the problem of people abandoning and the departure going up even more. the way to kill the goose laying this and golden egg is to insist it pay up quicker -- is that fair to say? >> it is very clear, mr. andrews, that we can, if we demand that plans -- let me step back one second, if i may. we are in a world in which financial markets and very a lot more than they used to.
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as a result, plans'financial statuses very a lot more than they used to. if we simultaneously, a world in which plans' financial status is variable, if we demand that a fund up more and more rapidly, we are going to make it harder and harder for folks to do that. >> which has the perverse effect of actually increasing pbgc exposure. it makes the problem worse from the deficit point, right? >> it clearly raises are risks. >> is it also true that many of these plans would benefit from structural internal reform -- putting that in plain english, lower benefits, higher contributions from some employers to improve their cash position. is it empirically true that is the case? >> it is -- we do not know the
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details of the individual plants. what a number have come to us and said -- we are in a box. the box is that if we keep on paying the benefits we have, we will pay those benefits for five years or seven years, what ever, and then we will run out of money and then you, not the pbgc, will allow them a smaller benefit. they have said they would like an ability to think about whether or not there are ways to resolve that that are fair to them. >> what we also conceptually -- >> if i may, i want to be clear -- my view of this is this is very sensitive. this gets to the guts, if you will, of the law. >> is a hard question.
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what we ought to start to contemplate conceptually is an arrangement where these facilities would help them expand their liability and deal with this in exchange for dealing with some difficult internal decisions, which hopefully would have the result of a relatively small benefit reduction now, avoiding a much larger benefit reduction down the road. i yield back. >> thank you. i yield to a chairman. >> thank you, mr. chairman, for your indulgence. thank you, director, for being here for what many people in america think are the holidays. some of us in this building, maybe not so much the holidays, but thank you very much. i have a whole bunch of questions. frankly, i will not ask. i just want to make it clear that with or without the chart up there, we recognize that
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there are multi employer plans that are in real trouble. hundreds of thousands of employees and retirees that are in trouble. we also recognize that the pbgc has a relatively limited ability to help them. the benefit payments are relatively low compared to single employer plans. i very much appreciate the chairman and mr. andrews' diligence pursuing this. i am determined to keep after this. we have some plans that are spectacularly in trouble -- that is not a secret name here. that one plant alone, you have employers that are in trouble because of these obligations and you have in that plan hundreds of thousands of its employees that are at jeopardy. i am hoping that if we wrap up this congress and work with
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those outside groups whose input we are eagerly awaiting to do something about this -- i think the work we did under chairman gaynor and ranking member miller was a good act. but clearly, even though the 60% looks nice out there, we know there are some big problems in the multi employer plans. i am eager to get at it. i see mr. miller is here. i know he recognizes there is a problem as well and i hope we are going to be able to come together and do something about this. because it is a multifaceted problem with the pbgc's limited capability and some plants that are in real trouble. thank you very much for being here today and for your testimony and your willingness to work with us as we try to solve this problem.
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i yield back. >> thank you, mr. chairman. thank you for being with us. a couple of quick questions. first, the number of plans, with the number of people covered by , are these the same charts? >> this may be because -- what we have done here is we have shown to the percentage of participants. this is the percent of 10 million people whose plans are in those segments. >> how are those charts for single plants different? are they in trouble? are they still in the 60% range? >they are not any worse than single plans? >> mr. scott, rather than make a
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guess about the exact comparison, since the standards are actually different for a single employer plans and multi employer plans let me come back with a charge for the record doing an apple to apple comparison. >> a multi company plan -- they are responsible for their proportionate share the liability. that is not much of a problem for a sovereign company, but when a company goes bankrupt, what happens? >> unfortunately what happens in a lot of cases is that the bankrupt company, along with its other obligations, is allowed in the bankruptcy process to eliminate its obligation to its pension plans.
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>> who picks it up? >> in the multi employer world, the obligations are picked up by the remaining employers. >> so with a company gets into one of these things, they are in risk of getting everybody else's liability this? >> yes. that is one of the issues that the hundreds of thousands of employers, small businesses and large, have continually raised. >> the pension fund -- they would argue the pension fund really ought to pick up the bankrupt company's share of the liabilities? >> mr. scott, i will say that over the years it has repeatedly been suggested to the pension benefit guaranty corporation, you know, rather than having the
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remaining employers take the responsibility, why does the pbgc not take the responsibility? the fact is that the pbgc does not have the resources to take on that responsibility. the multi employer plan -- the multi employer system designed 30 years ago did not anticipate that. part of the reason why i say that you need to rethink the pbgc's program in the context of how you rethink multi employers is because a lot of the suggestions we get and i suspect you will get would lean toward saying, why du not let .he pbgc pay for it - >> we would have to adjust the premium your pain because the coverage is different. >> -- you are paying because the
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coverage is different. >> i do not think this is something that change in premiums alone is going to resolve. i spent a lot of time in both single and multi employer plans and the sponsors of them and the businesses. some of the rhetoric i get about your premiums are too high is just rhetoric. but some of it is the very legitimate concern of businesses all across the country that are trying to stay competitive, trying to control their costs, and saying, you become too big a piece of my costs. i cannot keep doing it. >> one quick question before my time runs out -- if you can respond to the chairman's comment about how you can chase a 7.5% return without unreasonable risk. >> mr. scott, i do not have an
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answer for that. one of the things that we have learned over the last decade is that the assumptions that actuaries made, and it was not to statuaries, it was a lot of folks, and not this multi employer plans, a single employer plans, too. people who went through the 1990's tended to think that pension funds could make 9% or 10% or more. and it looked like it was going to last forever. the last 10 years, as you know, they had pension funds that have not earned 9%, 10% on average. so we are now frankly in a difficult situation because i do not think there is anybody who knows for sure what you can count on. so we do not have a particular recommendation for what a
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pension plan should do. we do not think we are smart enough to do that. but we do think that everybody recognizes the fact that the last 10 years have been tough and we are going to need to think about what to do for the future in the context of that. >> i thank the gentleman for yielding. >> thank you, mr. chairman. thank you, mr. gotbaum, for being here. last month, as we all know, a hostess decided to liquidate as a result of its bankruptcy. it had participated in 42 different multi employer plans. two of the company's largest creditors were multi employer plans. the withdrawal from these plants may cost the company up to $2 billion. at around $900 million going to the confectionery workers plan and more than 500 million going
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to the central states plan. large that they're very contributors to these plans, and following up to what mr. scott was questioning -- how will their bankruptcy effect these plants, and more specifically does it threaten their solvency? >> as you said, hostess participate in more than 40 -- numbers in my staff say 41, but more than 40 multi employer plans. in some of those plans, hostess has been a big dog. but in some of those plans, hostess has been a more modest but as a bin. for the plants where hostess was a big dog, the fact they were not going to contribute any more
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and would not be able to discharge their obligations is going to put those plans in severely distressed status. some of those plans will probably run out of money. others, plans were either they are stronger or hostess is a smaller percentage will continue on. but the employers in those plans will say, i am paying part of the cost h atpstess -- the cost that hostess avoided. >> for the larger ones, insolvency is the outcome? >> as it happens, the plans for which insolvency is a real risk as a result of hostess are
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relatively smaller plans. depending on how you count, how clear you want to be, they are four or five or six plans. these of the smaller plans. becausere plans that, beas they are one of the largest employers and they are no longer participating, they're going to be in severe financial distress. the largest plans in which hostess participated, they are relatively small percentage of the total. the hostess tragedy is not going to affect them substantially. >> in fiscal year 2008, the deficit in the multi employer program was $73 million.
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however, the past four years to have seen that deficit expand to $5.2 billion in fiscal year 2012. how have demographic trends created this increase, and what involvement the demographic trends have? the fact that people are living longer means that pensions, all pensions, are necessarily more expensive. a fact of life. most of the plans -- as a result, the plants that are sufficiently likely on the multi employer's side, what that means is that as people live longer we are going to end up paying a little more for it. in the broad scheme of things i
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think demographics, partly because it is slow and partly because it is long, is less of a risk to the security of the pbgc then the immediate financial or near-term financial, in the next decade, circumstance of a severely distressed plans. partly my reaction is, should i be distressed that people are living longer, healthier lives and they cause more? i don't think so. i think that is something we should celebrate. one of the great things about the nation. i think the more immediate concern. >> yield. >> thank you. >> i just want to follow up on somhing that charren started.
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you n't determine what they're rate of return should be and what the risk is going to be on that. don't you think we ought to be a little more conservative and the approach on that as opposed to a seven and a half% return given the history and given the fact that we have to deal with? >> i think it is pretty clear, sir, that's people whose expectations were set in the 90's, reset those expectations , reset those pectations based on the experience we've had in last decade. the reason why i was saying to be cautious aboutit is, there is a ris of overreacting on the downside in the same way that we may have overreacted on the upside. >> a lot of attention.
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i guess you will be making more modest projections with your calculations >> we actually are not in the business of making projections. and the way we do our books is we use -- excuse my droppin back into the jargon, we market to market, so the way we do our liability is we actually get close from insurance companies about what they would charge in order to pay benefits on what we do, and that is so we do it. we are not in the business of forecasting. >> but you are in the business of forecasting someof those quotes and rejecting others. >> i'm sorry? >> you're in the business of rejecting some and accepting of is when you make debt determination, so i assume you accept those on the more modest side and those who are more enthusiastic given the history.
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>> yes. >> thank you. the other question i have is about the hostess debacle. what role can you play when the company takes money from union employees and for contribution to their pension plan and does t make that contributioas well as not making their own company contribution? >> this is, sir, a very tough situation. i have spent my life working in distressed businesses. i've been on the management side and are represented unions, been all-around distressed companies for a long time. and i have learned a couple of things. one is when companies are in distress they take a series of actions to conserve cash.
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if they are legal. in the case of bankruptcy you can go to the court and say, not towards m contributions and get court approval for not making a contribution. >> to the stomach and the contribution? >> again city and of the facts. i'm happy to try to up as soon. >> that soon orders possibility do they have? >> i think you have it exactly right. the tstees of the 41 plans in which they participate our creditors. as it happens, hostess has a single employer plan. on the multi employer side we are not the creditors.
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we're a step removed from it. >> they sp making the contribution? >> i don't know. let me find out. >> if they did? >> that depends on what their legal obligations are in bankruptcy. >> what about before they get to a bankruptcy? >> if they fail to make contributions beforehand -- >> the contractual obligation a people and the union to pay with the union has designated as $4 some change per hour. plus not making their employer contributions, what obligation is it for the multi player plan to step in and do se enforcement, do something about that? before things go belly up. >> i think the me step back.
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when under bankruptcy -- >> your not in bankruptcy yet. before -- >> hostess has been in bankruptcy multiple times in the last few years. >> but there were times there were not in bankruptcy allegedly , they were not making a contribution. before they went back to bankruptcy court where they took it upon themselves to take the money from the employee's those designated cannot put it into e plan plus now make their own contribution. when that is happening what obligation to do something about that? >> that trustees of a plan. >> that pbgc and the single payer plan. >> right. >> can pass. we can act before bankruptcy, and we do. we can go to court and put liens on property in order to ensure
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that concretions are made if they are not made. >> that was not done in this situation. >> rather than speculate, i don't i get the facts. >> i would appreciate that if you would. thank you. >> and i yield to mr. thompson. >> thank you, chairman. thank you for being here. thank you for your testimony in this area. one, fit of all, with the report that you issued in your testimony, the graph on the third page that talks about future retiree worries, says 1979 based on that graf, obviously significant growth and direct contributions, programs. corresponding decrease in defined benefits. its green and the graph. which is -- our companies have
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had both. it seems like that has been pretty stable since 79 proportionally where our company offers but direct benefits and direct contributions. there you go. >> i was just curious. any inside information to make any proportiona changes within those -- where companies will both plans, whether it has been kind of a movement toward heavier weighting of direct contributions. >> many employers are deciding that rather than keeping responsibility for the traditional defined benefit plan that they instead would rather
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pass that responsibility off to their employees. they do it in a variety of ways. employers will say it said their employees, i know you thousand dollars a month in erpetuity, but wouldn't you rather have -- would you rather have a check for the full amount instead? people go out of the defined benefit system by lump-sum. they do in other ways. from my perspective one of the real challenges, one of the real challenges as the congress thinks about retirement security is out said balance the obligations you put on employers with the obligations.
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>> my career, we wer -- the first part of that almost 30 years. that was putting us on a path of insolvency as an institution. so there was -- and that all remember the most details. one option. a critical status plans and some seriously endangered plants are severely distressed andwill need still further provisions to remain viable. some options for insolvency without exposing taxpayers? >> what they have -- to be honest, the first reaction is why don't they take it over? they ignored the fact that they don't have the resources to do so, so that is my way a backdoor way trying to get to the
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taxpayers. what they are talking among themselves and will we expect is that some combination of stretchng out obligations, expanding the authorities that congress already gave them that with a broader palette of tools and authorities that they will be able to do self-help. we have not seen the specific proposals, and this is one ith a double actually is in the details. we are looking forward to receiving proposals, as i know this committee is. so at that pointhen we can talk about what we can take. >> at thank the gentleman for yielding. >> thank you, chairman and to
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you and your family and staff. i would like to yield the balance of my time back to our children second finish questions. >> at thank the gentleman for yielding. i don't have too many, but in what mr. thompson was saying and also i would like to comment, many because of the uncertainty, i guess, and these plans, and i have a real interest in this to my father was a union member who lost his job in 1973 when i was in the army overseas. his company went out of the country to another couny,lost his job and the losses pension plan. fifty years old. world war two, buyout of 10,000, which was nothing after 30 years there. i understand the plight of people who have been promising and it does not occur. you have major plans based on your thinking they're going to have a secure retirement. we have a real obligation to get
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this right because there are 10 million people out there, families, many retired with -- very an easy right now about am i going to continue to give my benefit. both sides of the aisle understand this very well. probably not allow the people in this congress understand the size of this problem. i know i didn't unl i started -- sat in this chair and began to understand that. i saw one of the liability estimates was 27 million, billion. how in the world are we going o find that? current obligations were 5 billion. so how do we get to 27? how do we fix that problem? we have talked about premiums. we both mentioned assumptions. i made the assumption when i retired at 5% would be what i would withdraw. that was more generous than what i should have picked. so your answer.
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>> the $27 billion number is an estimate of plans that might, unde current law in current circumstances might go -- might fail of the course of the next dictator so. that's an estimate. part of the reason why, frankly, your committee's deliberations, was a hearing matters, there is no one here thinks that it is written in stone that all these plans have to fail. we don't think that. and so what in my view matters is that the congress to what it did in 2006 and what you talked about doing here. on the phone:
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this is a train wreck. we needto plan the train ride is what we need to do here.
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>> thank you, mr. chairman. i'm sorry that i had to leave for a few minutes. chairman roe and ranking memb anders return of securities of greater importance to lives of americans, including me. so i thank you for having this hearing on the challenges facing the multi-player pension fund plan. bassador gautbaum coming your testimony you indicated multi- plants have been affected by recent declines in the economy and the investment markets as we saw starting in 2007 through 2010. could you elaborate and tell me about the problem of where 10 participants, which are participants for whom there is no longer in lawyer?
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at a significant problem for many of these multiemployer plans to do you have anythought on solutions? >> i can describe the problem. i can't tell you there's a standard solution, mr. hinooa. in single employer plan, you have one company that is setting aside limited to their employees. surface that market goes down and as a result the plan assets are insufficient, company knows they have to put on an and they're going to know this for their employees. the multiemployer wrld, you
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have hundreds of thousands of businesses, small businesses contributing to a small pool. now there are some very import benefits from that. one of them is that as a result their employees to stay constant when they move from job to job. that's a huge benefit. another benefit, speaking as a person has also worked on this as, you can be a member of the multi-employee plan without having a huge feature department. so it works better for a lot of small businesses. so there benefits to the model, buthere arecosts. one of the cost of the model is everybody's in it together and so if the plan is undrfunded, then the existing leaders are
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the ones who make up the difference. the issue is that since you had any employers, enhancing outcomes and small businesses don't make it in some industries a lot of small businesses don't make it. the results since the multiemployer plans, the bill, if you will have been presented to companies who now have most of the employees are not their employees and surveys say we don't like that. that doesn't seem fair to us. now, does that get taken -- and they take into account at that moment that they have in some cases decades and decades cut in benefits of the multiemployer model? obviously not. but that's the crux of the concern that businesses feel that it is unfair to a pay for
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the obligations of employees that were not ayers, even now, let's be clear, they have been sharing obligations in some cases for decades and decdes. this is not an easy issue by any means. i find it a lot easier to describe what the problem is making to tell you some fair and decent way it. >> time is running out and i wanted to thank you for that explanation. but i wanted to ask you about getting in the shoes of the employee who does not have to go through the human resources committee or department, but yet whatever money is set aside for them, atheists pay for those investing that money and often times the fee can be very expensive in the employee
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doesn't know just how expensive it is. number two, this administration cause in the employee again doesn't know how much is being subtracted out of every dollar that it's invested each year for his retirement. how do you handle that and how do you manage it so that it is, such as federal employees using the thrift savings plan how they negotiated cost for the investors and it's very, very low. it's a fraction of 1% per year. that's good, but what about these groups? >> let me answer if they can and mature permission or, i'd like to come back with a response. from their tip, one of the benefit of multiemployer plans is that many, many employers can
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hire and pay for a management that can drive hard bargains with investment firms. a management that can get economies of scale that she gets from high many people process without having hundreds of separate h.r. departments. we think there is an important benefit from that. what i can't tell you and don't know is what disclosure there is to the various participants of the cost of those plans. with your permission, seri, let me report on not for the record. >> thank you, gentleman for yielding. >> i think the chair for holding this hearing. i found it very educational and if you look on the mac you can see that indiana is very much effect did by this issue in these multiemployer pans and i
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hear about quite frequently as folks are men began a here. some of this absurd event touched on, but at the risk of reiteration of the key to shrill into it more so we are very clear for the record. so number one, i'm reading about the central states pension fund with liabilities of 14 billion. and if i noticed in your testimony or maybe facebook, i saw that your asset r. 1.billion. okay, so that concerns me. what happens if and when central state, something terrible happened there insolvency, how many more insolvencies can we sustain before you become insolvent clerks >> part of the reason why i say
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that anything that pbgc's on programs is because of issues you raised. it is clear because it had a couple billion dollars in assets and our premiums are prime numbers, $100 million here, mped up a little with the 120 next year, et cetera. but if we start becoming responsible for several billion dollars a year in pension payments, that we're going to ru out of money however. this is the important part. those plans come and it's not just a centrist peace plan. there are in that rent down there probably 200 plans, plans all across the cntry, not just on the border of indiana, et cetera. what we hear from non-is they
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don't want to run out of money. they don't want to become towards both the pbgc appeared they don't want a bi trip to pbgc. they would like to have the ability to work out their own self-help numbers. >> get the number of orphan retirees increases i mean, there's an insolvency issue in retirees and that's where monaco as well to make a loose analogy to social security when mr. roosevelt started their 100 workers for every retiree. another streak going to to in 15 years and it seems to me that these legacy work in retirees, how many to be having a system? do you even know and is it becoming harder and harder to support these reirees obviously with less companies paying into the system.
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>> in general, as i don't think we put on the testimony, but n our and her report, sytemwide averages about 1.5 people who are not active, retirees will be called deferred vested or active worker. so one point i have to is the ratio. there is areas where it's 10 to one. those plans obviously cannot turn to the active employees and say okay, you're going to increase your contributions by effect or five and go in. something synaptic is. i don't think that anyone can be defended as and say there is a particular masher that you can legislate that will work for all
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of the different kinds of plans better they are nd that's the point they should've made and i'm grateful for your enabling to make it. part of the reason my flexibility matters, the flexibility team in 2600 why whatever you do prospectively matters i that the circumstance of the folks who are green is ry different from the folks who are in the rad and we don't want to force someone into the shoes of the other. >> thank you, chairman. i yield. >> mr. hanna. >> thank you for being here, sir. for the last 10 years, we haven't been to the market. you can see that. but you can see from 2009 july 201111 from 34 to 24.
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we also know for about a hundred years the markets returned an average is someplace between 9% and 11% in us as mentioned, these are critical to that. when looking for something that has a positive side and that is tables were filled to guarantee these defined benefit plans those around long-held assumptions that are broken down the last 10 years. in your mind or with your understanding of all this, this year it looks like the market they be up 9% or 10%. how many are suited to to take 90% of the red and put them back in the green? what is historically because there's nothing fundamentally wrong based on the knowledge they have. were looking at the tender spot in saying this is horrible, which of course it is in plans are going broke. this may not last forever either. hopefully it won't be so many people unemployed, et cetera, et
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cetera. looking forward, what do you see? >> let me talk in general now and if i may come especially after we get you the reports the ou all, i would like to answer in more detail. there arelearly some plan who evenf you think they look at the long-term average equity return, because the experience of the last 10 years has been so bad, they are in trouble and they will be in trouble and just praying for the stock market by itself won't help. it will help some, but it probably won't be sufficient. there a some plans. there are other plans for whom
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the recovery of the stock market if it gets back to the long-term average will enable them along with other this to recover. so we know there's some in town and some of the other. if i may come as since this is in pt because of the reports that we are working to send you all, after we've done this report, come back and give y a little more detail statement of how many rethink current one versus the other appreciate the opportunity to do that. >> defined benefit plans are great. people are told they have to invest for themselves. as he said, was 34 to one when personnel develop social security now it's different. but that's always going to be the new motto, isn't it? a lot of companies are getting away from defined benefit plans based on the assumptions of the last 10 years and things like mr. made often those things.
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it's not a bad model, but it's also true to find benefit plans, really what works best for families in the long run. >> i could not save any better. thank you are saying it. >> i'm all done. >> pathetic attempt to think director gautbaum for taking time to testify before the committee today and i recognize closing remarks from a ranking meer, mr. andrews. >> thank you, mr. chairman. i think our colleagues and mr. gautbaum for attending and doing such a good job today. this is a prblem we set out on the right path to solve, which is to collect a range of views from a series of people with expertise and learn from them. mr. chairman, i'm confident if we continue down the path we
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will find these decisions that achieves the goals of helping small businesses to pay into these plans prosper and grow, that assures the maximum degree of security for pension payments for families who depend n them and approves the fiscal health of the pbgc so we further minimize the possibility the pbgc whatever call upo the federal treasury to make its obligations. what i've learned so far been listening to today's questions and answers in the prior hearing is t credit facilities at the 2006 and 2010 was made available has contributed substantially to the growth of the green sound from 32% to 60%. certainly demographic trends in economic growth have contributed, but the availability of facilities has had positive impact.
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i guessable approach discussions at the press that we should further facilitate those credit facilities to multiemployer plans in a variety of ways, but we should patch conditions depending upon the stat of the plan. i think relatively healthy plants should have the opportunity to take advantage of such a facility, but i think i'm healthy plants frankly should have something more in the nare of an obligation to take it into job. and when they do, i think this plan should have become current obligation to make internal structural changes however unpopular or difficult that will improve their health and with it improve the fiscal house of the pbgc. this is not a problem for which the solution wil be painless, easy on controversial. but if we take the path to often taken here in washington and hope that it gets better, which
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is emphatically not what the chairman is doing, th i think it for sure what they're worse. there are 10 million people depending upon us. there's hundreds of thousands of employers depending upon us and i do think we've taken to very good steps towards a sober while considered a mature approach to soing this problem. i look forward to working with you, mr. chairman and colleagues and mr. gautbaum come to you and your colleagues, and listening to before on the kosher with the state to solve it. i appreciate the opportunity to be with us today. >> i thank the gentleman for yielding and his commentsrom chair. i'm absolutely committed in the subcommittee is committed to helping solve this problem and it's imperative we do that. there are many pension plans, not only the employer plan, but i think many pension plans in states and others that are extremist now will be looking
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looking at us for guidance on how we manage through this morass we are in right now. so you made the comment in your testimony that the pbgc is a risk for having neither sufficient full text most employer can see what their problem, nor friends to pay benefits beyond the next decade under the mutiplayer insurance plan. that's a pretty sobering statement. working together certainly work on tools you need to do your job and we can certainly do that. i had several thoughts appear too dangerous to bring them up, no solutions, but we had the assumptions problem about the assumptions we made. s it possible in these plans desegregate? the last man standing will create some issues for the stronger plants, for instance cps decided to get out. they wrote a check for $6 billion got out to the future liabilities.
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with credit facilities is about what is to keepa strong come to me after who is a pretty financial balance sheet to look at multiemployer plans and look at the $14 billion liability and the money will run out at some time to alk. i think that's a real issue for multiemployer plans which would further weaken them. ms mr. hanna has clearly stated, once gain the benefit are limited down because people who currently receive in benefits be cut, but as he stated in her testimony come you're going to go back to current empoyees and say hey, you need to pony up some more money that you may never get. so i think that's an issue and another issue is that the pbgc lines up in bankruptcy. i think this situation is clear
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that up to firm up the line line, and place it over there for decades are not at the front of the line. they could potentially beginning in much reduced benefit. doesn't mean that they will. i think a lot of those things are just questions, not particularly solution, the things we have to work on them we don't have a lot of time to do it. the subcommittee is very active in coming up with legislation to help and i'm interested in knowing how much of the green has been improved by our accounting that we changed the assumptions becuse i think of .5%, even though i understand the historic assumions have not occurred in the last 10, 12 plus years. i started this discussion in 2003. it took 10 years, almost 10 years to get there. but if we look at our future liability as thearket went
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down, i make about 10, 11% of how much salaries going in. as the comic over specific 18% or 19% of their income, which restraining the city budget. so we started the discussion that new retirees if you kept your promise to current employees, the new heidi reese would have the defined contribution plan. many businesses look at that simply because of this. what we end up doing if we do this right and encourage other businesses to stay with the defined benefit plan for employees. i think we have a huge application. i will finish by saying we will miss don payne who served 20 years this committee and did so with great dignity and tell kildee and dennis kucinich won't be with us on the subcommittee there. mr. cody is retiring to mr. kucinich going on.
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judy becker would not be here. it's been a great pleasure to serve a thoughtless member denigrate china. i want to passmy congratulations on to them, to wish everyone a merry christmas. and jason ault meyer. i forgot my friend jason also. he was on and then off and then back on. he did serve. we appreciate his service. i wish everyone a merry christmas. we can go on and on. anyway, we may have to get a whole list to read. anyway, merry christmas, we are adjourned. [inaudible conversations] [inaudible conversations]
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samaj [inaudible conversations] [inaudible conversations]
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